Why Paying Off All of Your Student Debt is Not Always a Good Thing

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On their very popular podcast, the Minimalists recently posted an episode on debt. Generally I think the ideas they espouse are really good, and I've learned a lot of helpful tips from them. In a country where far too many people live in excess, the Minimalists provide a road map for people interested in living happier lives with less.

However, for those who enjoy their podcast as much as I do, you may have been as disappointed as I am with some of their views on debt. Ryan Nicodemus sort of takes a back seat on this topic, and actually seems more reasonable than Joshua Fields Millburn, suggesting that debt can be used responsibly if necessary. In this episode, Ryan's view is to take on as little debt as you can and pay it off as quickly as possible. Josh, on the other hand, takes an extreme stance that any and all debt is bad — and that the only option is to pay it off immediately — even at the expense of your sanity, precious time, or opportunity costs.

My suggestion is to not be too hard on yourself if you have certain kinds of debt. Obviously, take an honest assessment of your individual situation and use your gut. If you want to get on a path to freedom from debt, talk to a financial advisor or a friend who is good with their finances if you don’t have the skills yourself. In most cases, the quick payoff is the smartest way to go.

I won’t go into depth on the Minimalists' ideas about financing your education. Sure, in a perfect world, no one would graduate with any debt for trying to better themselves with higher education. The system is naturally flawed. But just because you did not plan on becoming a doctor or lawyer doesn't mean that it was a bad decision to take on student debt to get ahead and give you leverage to follow your passion. Sure, there are arguments for not getting a degree in certain situations. Sometimes you can work your ass of for a decade, proving yourself over and over again before finally (maybe) winning the lottery for that job of your dreams. But for the vast majority of us, that just isn't an option. Getting a degree is the quickest path to success.

The long-term earning potential for a college graduate far outweighs the costs over a lifetime. Someone who holds a bachelor’s degree earns almost double that of someone with a high school diploma, on average. Should you minimize the debt you take on? Absolutely. Schools should also do a better job to help students understand the long-term implications of taking on student debt so that a financed summer in Italy or spring break in Cabo just don't look so compelling to an 18 year old.

In the Minimalists' episode on debt, one caller posed a question via voicemail. She took on $70,000 in debt to go to graduate school and now works for a nonprofit. She is part of the Public Service Loan Forgiveness program, and her question for Josh and Ryan was whether or not she should just pay it all off as quickly as possible or put in the 10 years in public service required of the program and have the remaining debt be forgiven? At first, Ryan started by saying that those programs are there for a reason, but Josh quickly responded that she should just “pay it off as soon as possible."

This is where I wholeheartedly disagree. Because of math. Let's begin with the fact that there is no way for her to erase her decision to take on this debt. Even in bankruptcy, student loans do not go away. However, by working in a public service field, she has the opportunity to have some of her debt forgiven through the Public Service Loan Forgiveness (PSLF) program through the U.S. Department of Education. Under this program, if you do not make a lot of money (a meaningful career in public service — go figure), you can get on an Income-Driven Repayment Plan. These programs can limit your student loan payments to 10% of your discretionary income, as defined by the amount you make over a certain percentage of the national poverty line. If your loans are big enough, you may not pay even the interest on that loan. I know that sounds scary, but hear me out. After 10 years of payments in a public service job, the remainder of your loan is forgiven. And guess what else? All of that interest that you pay? It’s a tax write-off (up to $2500/yr). Depending on your income, you could get a pretty substantial percentage of your payments back at the end of each tax year.

Below I run a few basic repayment scenarios outlining why JFM's advice is not only financially bad, but why, in my opinion, it is counter intuitive to a minimalist lifestyle.

Bear with me while we look at some repayment examples.

 

Scenario 1 — Normal Payment Plan:

$70,000, 7.5%, minimum payment ($517.29) @ 25 years (normal gov’t pmt plan) = $155,188.15 paid in both principal and interest.

Scenario 2 —Pay Off ASAP (assumes double payments):

$70,000, 7.5%, double payments ($1034.58) @ 7 years 5 months = $91,277 paid in both principal and interest.

Scenario 3 — The PSLF Program:

$70,000, 7.5%, income based repayment plan ($400 @ 2% increases annually due to income growth) = $52,558 repaid (the rest forgiven).

 

Potential savings on the Public Service Loan Forgiveness program as compared to the double payment scenario is $38,719. And that doesn't even include the tax benefits of up to $2500/yr.

This is no small sum. Think of all of the things you could do with that money, not least of which would be saving for retirement.

With a conservative hourly wage at a nonprofit earning $20/hr is $31,200/year after taxes, or $2,600 per month. Double student loan payments would be almost 50% of their income for 7.5 years. We in the affordable housing realm have a name for paying 50% of your income on anything: poverty.

If she paid the recommended 30% of her income on housing, which is nearly impossible these days with the way that rent is going up, she would be left with about $600-700 per month for ALL of the rest of her needs for seven and a half years. That's less than what the average person living on social security and living in public housing makes.

I can all but guarantee that if she takes their advice that she is going to have the most miserable seven and half years of her life scrimping and budgeting, all while she was trying to have a better life by going to college, not a worse one.

The opportunity costs, wasted time, wasted money, and lower quality of life all to repay something that would be forgiven anyway just does not compute for me. We can debate whether or not it was a good idea to get into this much debt in the first place, but the ideas presented on the program represent unsound financial advice.